Self-funding of regulators would help fiscal mess
By: Brooksley Born and William Donaldson March 10, 2013 09:03 PM EDT

Washington has been abuzz with the automatic, across-the-board spending cuts taking effect, known as the sequester. While many have been focused on the impact on education, law enforcement and transportation safety, another important area that deserves attention is the impact on our financial market regulators: the Securities and Exchange Commission and the Commodity Futures Trading Commission. It is both wrong and dangerous to impose funding cuts on these agencies. They are already underfunded in light of their enormous new responsibilities under the Dodd-Frank Act.

The Systemic Risk Council believes that the SEC and CFTC need a robust — and dependable — source of funding. Unlike every other financial regulatory agency, the SEC and CFTC must rely on Congress for their annual funding. Other federal financial regulators (including the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and even the new Consumer Financial Protection Bureau) do not have to rely on an unpredictable congressional appropriations process for their budgets. Other regulators assess fees on industry and use those fees to fund their activities as is appropriate. Taxpayers should not have to pay for the costs of regulation.

The difference between self-funding and the appropriations process is enormous. Self-funding helps agencies hire and retain good staff and insulates them from political pressure exerted by the deep-pocketed institutions they regulate. It also allows them to make and implement strategic decisions to adapt to changing markets and build needed information technology to become more effective and efficient, all of which require multiyear budget certainty. The SEC and the CFTC have none of those advantages.

In coming days, those differences will become crystal clear: The SEC and the CFTC — two agencies responsible for implementing a host of new requirements under the Dodd-Frank Act (including, most importantly, building an entirely new regulatory regime for the multitrillion-dollar over-the-counter derivatives market) — will start facing millions in cuts. Rather than focusing on critical systemic risk matters like finalizing Dodd-Frank rules or reforming money market funds, the agencies will be required to implement funding cuts, delaying needed hiring, rule making and the pace of reform.

The self-funded agencies, by contrast, will function normally: no cuts and no need to delay important actions. While that is good news for the Fed’s payment system, for FDIC guaranteed depositors and for bank oversight, the lack of self-funding for the SEC and CFTC is bad news for reducing serious risks to our financial system and rebuilding confidence in our markets and our policymakers.

Moreover, self-funding of these agencies would improve our fiscal situation. At most financial regulators, including at the SEC, financial regulation is paid for by fees — not by the taxpayer. Extending that authority to the CFTC, and enabling both the SEC and CFTC to be fully self-funded, would lower taxpayer costs and deficit spending and dramatically improve our financial markets.

If we want to reduce systemic risk through vigorous oversight of securities and derivatives markets, the SEC and CFTC need to have a process in place that ensures them adequate funds to discharge their enormous responsibilities over the long term. Self-funding would do so.

Brooksley Born is former chairman of the CFTC and William Donaldson is former chairman of the SEC. Both are members of The Systemic Risk Council, an independent nonpartisan group that monitors and encourages regulatory reform of U.S. capital markets focused on systemic risk.